This is my personal blog. Travel, financial and political observations. Notes to myself and my friends. Content development for my monthly newsletter, Porter Stansberry's Investment Advisory (www.stansberryresearch.com).

Friday, April 07, 2006


Here’s what’s troubled me about some (not all) of the prosecutions following the great bull market of the 1990s…

When someone commits a financial crime or a civil fraud, it’s usually easy to spot. Take the former CFO of Patterson Energy. Living in Synder, Texas and working for the only big company in town made it pretty easy to spot the extra $60 million or so he embezzled from Patterson. You can also see the clear link between his criminal intent (to steal), the actions he took (creating dummy corporations) and the benefits he gained (temporarily).

Likewise, when someone commits fraud, they end up with things they had no right to – usually profits.

So… what did Bernie Ebbers end up with? Nothing, he went bankrupt. What about Ken Lay? Likewise, nothing: he sold all of his Enron stock on the way down to cover margin calls. He was wiped out financially and his reputation has been destroyed. What about Martha Stewart? If she hadn’t sold the stock when she did, it would have been worth more money later. By taking Sam Waksal’s “tip” she probably lost money, not to mention losing her freedom for six months.

Other way I like to judge the amount of Federal grandstanding in these cases is to think about what would have happened if these “criminals” hadn’t been caught. If Bernie Ebber’s WorldCom hadn’t gone out of business, the way the company handled its accounting for local line access would have never been considered a crime. AOL did essentially the same thing for years during the late 1990s – the capitalized their marketing costs. Also, it’s important to note that the company’s accounting had nothing to do with its bankruptcy. The company went broke because it paid way too much money for MCI and it couldn’t afford the corresponding debt obligations. Bernie’s decision couldn’t have been criminal because who would intentionally bankrupt their own company and go broke in the process… It doesn’t make any sense.

Obviously, some of the era’s fraudsters don’t pass the “what if they didn’t get caught” test. Take the Solamon Brothers telecom analyst, Jack Grubman, who upgraded his rating on AT&T so that his firm would get part of the IPO business on the AT&T spin-off, AT&T Wireless. Emails show pretty clearly part of the reason Jack Grumman changed his rating on the stock was so that Citigroup Chairman Sandy Weil would help get Grubman’s twin boys into a prestigious kindergarten. If Grubman had never been caught -- if the telecom bubble hadn’t burst bringing him down with it -- he still would be guilty of accepting benefits in exchange for touting an investment he knew was actually low quality. He would have still committed a fraud.

What about Ken Lay? If Enron hadn’t gone bankrupt, would he be guilty of any crimes? He is charged with defrauding investors by telling them Enron’s finances were sound and that the company’s prospects were bright. Why would he have said those things if he didn’t believe them to be true? How did these “fraudulent” statements benefit Ken Lay? They didn’t. He was being forced to liquidate his Enron holdings because of margin calls. At the very worst, Ken was trying to save his company by rallying his employees in the midst of a terrible crisis. If he had succeeded, he would have been applauded. But, because he failed…should he be convicted of fraud…?


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